The stock market is a crucial component of a country’s economy, serving as a barometer for its financial health and a platform for businesses to raise capital. In the Philippines, the stock market operates through the Philippine Stock Exchange (PSE), which is one of the oldest stock exchanges in Asia. Understanding how the stock market works in the Philippines can provide valuable insights into investment opportunities, economic trends, and the overall financial landscape of the country.

Understanding the Stock Market

At its core, the stock market is a marketplace where securities such as stocks and bonds are bought and sold. Stocks represent ownership shares in a company, while bonds are debt instruments that companies or governments issue to raise money. Investors buy stocks with the hope that their value will increase over time, allowing them to sell at a profit. Conversely, bonds are purchased for their interest income and relative safety compared to stocks.

The PSE, located in Metro Manila, is the central hub for stock trading in the Philippines. It facilitates the buying and selling of stocks through a network of brokers and electronic trading platforms. The PSE is regulated by the Securities and Exchange Commission (SEC), ensuring that trading practices are fair and transparent, protecting both investors and the integrity of the market.

How the Philippine Stock Market Works

1. Listing of Companies

For a company to trade its shares on the PSE, it must first go through an Initial Public Offering (IPO). During an IPO, the company offers a portion of its shares to the public for the first time. This process involves rigorous regulatory scrutiny to ensure the company’s financial health and compliance with market regulations. Once listed, the company’s shares can be freely traded among investors.

2. Trading Process

Trading on the PSE occurs through an electronic system known as the PSEtrade XTS. This system matches buy and sell orders from investors. Trading sessions typically run from Monday to Friday, with a pre-opening period starting at 9:00 AM and the regular trading session from 9:30 AM to 3:30 PM. The market is closed on weekends and public holidays.

3. Role of Brokers

Investors cannot directly trade stocks on the PSE; they must go through licensed brokers. These brokers act as intermediaries, executing buy or sell orders on behalf of their clients. Investors can place orders through various channels, including online trading platforms, phone, or in person. Brokers charge a commission for their services, which is usually a percentage of the transaction value.

4. Market Indices

The performance of the Philippine stock market is often gauged using indices, with the PSE Composite Index (PSEi) being the most prominent. The PSEi tracks the performance of the top 30 publicly traded companies in the country, providing a snapshot of the market’s overall health. Other indices, such as the All Shares Index and sectoral indices, track broader segments of the market.

Benefits of Investing in the Stock Market

1. Wealth Accumulation

One of the primary motivations for investing in the stock market is the potential for wealth accumulation. Historically, stocks have provided higher returns compared to other asset classes such as bonds or savings accounts. By investing in a diversified portfolio of stocks, investors can benefit from capital appreciation and dividend income.

2. Ownership in Companies

When investors buy shares, they become part-owners of the company. This ownership entitles them to a portion of the company’s profits, typically distributed as dividends. Additionally, shareholders have voting rights in major company decisions, such as electing the board of directors.

3. Liquidity

The stock market offers liquidity, meaning investors can easily buy or sell their shares. This liquidity is essential for managing investment portfolios and responding to market conditions. Unlike real estate or other illiquid investments, stocks can be quickly converted to cash.

Risks and Considerations

1. Market Volatility

Stock prices can be highly volatile, influenced by a myriad of factors including economic data, corporate earnings, geopolitical events, and market sentiment. This volatility can result in significant short-term losses, making it essential for investors to have a long-term perspective and risk tolerance.

2. Company Performance

The value of stocks is directly tied to the performance of the underlying companies. Poor management decisions, competitive pressures, and economic downturns can negatively impact a company’s stock price. Therefore, thorough research and analysis are crucial before making investment decisions.

3. Regulatory and Economic Factors

Changes in government policies, tax laws, and economic conditions can affect the stock market. For example, changes in interest rates or inflation can influence investor behavior and stock prices. Keeping abreast of economic indicators and regulatory changes is vital for informed investing.

Investing in the Philippine Stock Market

1. Getting Started

To start investing in the Philippine stock market, individuals need to open an account with a PSE-accredited broker. Many brokers offer online platforms that provide access to market data, research reports, and trading tools. Investors should assess their financial goals, risk tolerance, and investment horizon before making decisions.

2. Diversification

Diversification is a key strategy to mitigate risk in stock market investing. By spreading investments across various sectors and companies, investors can reduce the impact of poor performance in any single stock. Exchange-traded funds (ETFs) and mutual funds are popular vehicles for achieving diversification.

3. Continuous Learning

The stock market is dynamic, with constant changes and new developments. Continuous learning and staying informed about market trends, company news, and economic indicators are essential for successful investing. Many brokers and financial institutions offer educational resources and seminars to help investors build their knowledge.

The stock market in the Philippines, anchored by the Philippine Stock Exchange, plays a vital role in the country’s economic development. It provides a platform for companies to raise capital and for investors to build wealth. While investing in the stock market carries risks, a well-informed and strategic approach can lead to significant financial rewards. By understanding how the stock market works and staying informed about market trends, investors can navigate the complexities of the financial landscape and achieve their investment goals.

The year is almost over and this has been a whirlwind of a year for the Philippine Stock Markets. The start of the year saw a tremendous surge of the market pushing the Philippine Stock Index beyond the 7000 mark. Towards the middle of the year, massive correction and decline was seen as foreign funds took profits but our market seems to be more resilient than ever. Some recovery was seen pushing the market up again and refusing to enter a bearish market. Our market has yet to go back to the 7000 mark but many analysts are confident we will be back to those levels sooner than later, perhaps early next year?

For those who invested in equity pooled funds like mutual funds or Unit Investment Trust Funds (UITF), it is good to know that there continues to be good returns although not as substantial as 2012. I have collated the 1 year returns of the top 8 equity funds, both mutual funds and UITFs. On the mutual funds side, the 2 index funds rose to be the top performers for the 1 year period lead by the Philippine Stock Index Fund and the Philequity PSE Index Fund. Customarily, managed funds outperforms the index, but that’s not the case for this 1 year period. On the other hand, some UITFs performed better than the index funds and 5 of those UITFs registered above 20% returns for 1 year led by Union Bank, Metro Bank and BDO and BPI. The UITF equity funds seems to be performing better than their mutual fund counterparts for the 1 year period.

Let me repost what I earlier said in an earlier post: “I need to caution readers, however, that returns are not the sole factor if selecting a fund. Aside from fees, it will be good to check on how volatile the funds are, experience of the fund manager and size of fund. Bigger funds are usually less volatile but may not have the best performance. Further, equity funds that are more diversified and having more variety in the fund is generally less risky.”

Mutual Funds are available through Mutual Funds Companies and are regulated by the SEC. UITFs are available through banks and are regulated by the BSP.

With all the good things we hear about the Stock Market, are we to expect that more Pinoys are now investing there? Not really. Data from the Philippine Stock Exchange (PSE) reveals this –

In 2011, there were 505,054 accounts registered among all active trading participants, up by 1.3% from the previous year’s total of 498,838 accounts. Of the total 505,054 accounts, 478,362 or 94.7% were considered retail while 26,692 or 5.3% were classified as institutional accounts.

Here’s more –

Of the total accounts in 2011, 157,535 or 31.2% were considered active. Active accounts are defined as accounts that have traded at least once during the year. The number of active accounts in 2011 rose by 31.3% from the previous year’s total of 120,016 accounts.

What the numbers are saying is this – only a handful of Pinoys are invested in the PSE! 500 K out of over a 90 M population makes that a very small percentage – roughly 0.5% of the population. With all the gains of the market in the recent years, Pinoys could have taken advantage of improving their financial situation… but unfortunately, only a handful did. While I don’t expect a staggering percentage of Pinoys investing in the market because of its risk and complexity, 0.5% is just way too miniscule. By contrast, some countries have 30 to 50% (or more) of their population investing in their Stock Market directly or indirectly through funds.

There are reasons why people stay away from the Stock Market but the top two reasons I would like to believe is ignorance and fear.

Admittedly, the Stock Market requires some studying before anyone should enter it. I always remind people not to invest in anything you don’t understand; but the Stock Market isn’t also rocket science and I have faith that the average Pinoy would be able to understand equity investing – or at least 1/3 of our population can. Reading a starter book, researching over the internet or better yet attending a seminar will do wonders to enlighten Pinoys on what the Stock Market is all about. Basic understanding of how the Stock Market operates is a worthwhile endeavor for us Pinoys because we can really benefit by investing in it – at the same time help the country grow its capital market (a discussion for another blog). A healthy and robust stock market that is sizeable in volume is very good for the economy. Currently, the PSE is healthy and robust albeit with very little volume.

Fear is another issue amongst us Pinoy. It has been a noted fact the Filipinos are risk-averse in nature, meaning we tend to avoid risks especially in investing and business. Proof of which is our huge money in Savings account and Special Deposit Accounts. BSP numbers pegs bank accounts (Savings, Checking & Time Deposits) at about P 5 Trillion while Special Deposit Accounts (SDA) at approximately P 1.5 Trillion. A big chunk of the money of the Pinoys is not really being invested and definitely not earning properly. While Bank accounts and the SDA are really safe investments, their yields are almost certain to be below inflation rates which means that most of our money are really eroding in value.

My recommendation is this – let us all learn about investing because it is one of those things that will bring us financial freedom and it can empowers us. Let us also not be crippled by fear because if we risk nothing, we gain nothing and I don’t mean speculating or gambling our hard earned money away – we can learn to diversify and practice prudent investment planning. If individual investing in the Stock Market may be too much for us to bear, then I suggest we look at pooled equity funds like the UITFs or Mutual Funds as well. Regardless of investing directly or indirectly, I believe it’s time for Pinoys to learn and invest in the Philippine Stock Market.

My 2 cents.